EXECUTIVE SUMMARY OF KEY RESULTS OF RECENT RESEARCH ON SUPPLIER DEVELOPMENT STRATEGIES AND OUTCOMES

Executive REPORT of KEY results OF recent research on supplier development strategies and outcomesPrepared by Robert Handfield, Director

Supply Chain Resource ConsortiumNorth Carolina State University

College of Management

http://scrc.ncsu.edu(843) 814 5494

for

Jon Stegner

Director, Supply Management

Delphi Automotive

Detroit, MIExecutive REPORT of KEY results OF recent research on supplier development strategies and outcomes

Summative overviewThis executive summary provides key research results based on recent research on supplier development from the following sources:

Daniel Krause, Doctoral Dissertation, Arizona State University (1994)

Handfield, Robert and Krause, Daniel, Supplier Development Module Report, Global Procurement and Supply Chain Benchmarking Initiative, Michigan State University (1996)

Krause, Daniel and Handfield, Robert Developing a World-Class Supply Base, CAPS Research Report, Center for Advanced Purchasing Studies: Tempe, Arizona, 1999. Handfield, Robert, Krause, Daniel, Scannell, Tom, and Monczka, R., Avoid the Pitfalls in Supplier Development, Sloan Management Review, vol. 41, no. 2, Winter 2000, pp. 37-49.

Results of this research indicate that:

Supplier development strategies can result in significant improvements in supplier performance, including Reducing product defects by 5 - 90%,

Improving on-time delivery by 6 15%,

Reducing order fulfillment cycle time by 30 80%, Improving product performance by 10 to 30% Not all supplier development initiatives are successful in fact, as many as 50% are not successful, due to poor implementation and follow-up.

Most firms engage in reactive supplier development approaches (which addresses sporadic problems), as opposed to strategic supplier development approaches (which addresses continuous improvement of the entire supply base)

Approaches to supplier development include rewarding performance (The Carrot), penalizing poor performance (The Stick), on-going detailed assessment and feedback (Measurement), and direct involvement in suppliers operations (Hands-On Approach)

Research on which approach is most effective suggests that a combination of approaches may be appropriate under different circumstances, depending on the nature of the supplier, the type of commodity, and the management team at the supplier.

Executive REPORT of KEY results OF recent research on supplier development strategies and outcomes

defining supplier developmentCompanies now know that suppliers of critical goods and services can provide major competitive benefits, in the form of lower costs, improved quality, on-time delivery, technological innovation, and customer service. As firms seek to globalize their businesses, they must also bring with them a capable supply base that can likewise support these global initiatives into new markets and businesses, as well as drive costs out of the supply chain. In our studies, we employed the following definition:

Supplier development is a bilateral effort by both the buying and supplying organizations to jointly improve the suppliers performance and/or capabilities in one or more of the following areas: cost, quality, delivery, time-to-market, technology, managerial capability, financial viability and environmental.

In employing this definition, it is important to identify the hierarchy of strategies that must be established prior to deployment of these practices. As shown in Figure 1, firms often begin the process of continuous improvement through extensive internal training programs to educate company and purchasing personnel in basic TQM principles. Training is often carried out by quality department managers, using two to three day seminars on continuous improvement, customer satisfaction, basic statistics and process capability. These initiatives later mature into a focus on the goal of assessing supplier performance. Organizations at this level realized that in order to improve material quality and performance, a history of supplier performance is necessary for future effective decision-making and sourcing strategy formulation. Key measures of quality include percent acceptable vs. rejected lots, parts per million defective, warranty percentages, reliability, process capability ratios, percent parts rejected, and internal/external customer satisfaction. Practices also included developing a cooperative approach to setting specifications, listing of "problem" suppliers, definition of target quality levels, employing common measurement systems across strategic business units, and pre-qualifying suppliers.

Once assessed, companies often focused on consolidation of volumes with fewer suppliers, in order to eliminate those suppliers incapable of meeting expectations. Supplier databases often pinpointed those suppliers consistently unable to perform, resulting in fewer suppliers getting more of the business. This first cut of reducing the supply base is often fairly easy to implement, as non-performance is easy to identify once an assessment system is in place. Almost all of the companies who responded have already gone through several rounds of supply base reduction, and are closing in on optimizing their supply base to an appropriate number of suppliers. Many of these practices were implemented during the 1980s and early 1990s.

The focus of this report is therefore targets those organizations seeking to improve the performance of those suppliers remaining in an optimized supply base.

Results from a large scale survey of over 500 supplier development efforts by Krause (1994) indicates that respondents found that supplier development results (measured as supplier performance before the development effort versus after) included:

reductions in incoming defects by 6.2% improvement in on-time delivery by 21% reductions in order to delivery cycle time by 12 days improvement in orders received complete by 8%.However, results (shown in Figure 3) also suggested that not all of the buyers surveyed were satisfied with the outcomes of their supplier development efforts. Moreover, some supplier development efforts actually resulted in deterioration in the level of satisfaction. This was particularly true with respect to supplier performance in product innovation and ability to reduce total cost. A Supplier Development manager at Chrysler noted that:Some suppliers do not respond after multiple interventions. Even though they are saying the right things, nothing happens. Involvement with suppliers spans between 6 months and 1.5 years on average. 80% of the time, there are significant performance improvements. In 20% of the cases, there are none.)

strategic versus reactive approaches to supplier developmentIn 1996, another research effort was initiated through the Global Procurement and Supply Chain Benchmarking Initiative, focusing on supplier development best practices. This research studied written responses from 84 companies to questions regarding supplier development practices, as well as responses to a survey.

As shown in Figure 4, companies employed a diverse set of supplier development strategies. Moreover, these approaches can be classified into supplier-specific improvement projects, or efforts to improve the capabilities of the entire supply base. Further, initiatives either focused on product-level or process-level improvements. Companies reporting in the study were classified as belonging in one of two categories: those firms focusing on Strategic Supplier Development, or Reactive Supplier Development. The former group of companies (n=50) were focused on actively concentrating their efforts on improving the long-term capabilities of suppliers of the most important commodities, while companies with reactive supplier development strategies (n = 34) adopted an ad hoc response to eliminating supplier deficiencies.

As can be seen in Figure 5, companies employing a strategic approach to supplier development often focused on improving capabilities of the entire supply base, and then funneled these efforts into supplier-specific improvements. On the other hand, reactive companies typically reacted to major deficiencies that arose as a result of a crisis situation, (described by one manager as a burning platform!)

Figure 6 shows some of the other major differences between reactive and strategic supplier development approaches. Moreover, strategic supplier development approaches focus on allocating resources for supplier improvement, with an objective of continuously improving the supply base in the long term. This process is undertaken by an executive-level assessment of critical commodities and suppliers, followed by a focused improvement carried out by a commodity or development team.

Respondents were asked (using an open ended question) to identify the five most important circumstances, events, or requirements that would be classified as drivers for supplier development. Figure 7 shows the percent of respondents within a specific classification (strategic or reactive) that identified the associated driver. For example, 16 of the 50 firms classified as strategic identified the goal of developing a strategic partnership as a key driver of their development efforts. The Diff column represents the difference between the two groups.

Figure 7 - COMPETITIVE PRIORITIESDriverStrategic (n = 50)Reactive (n = 34)Diff.

Strategic Partnership32 %15 %17 %

Technology34 %24 %10 %

Amount or Criticality of Business10 %3 %7 %

Standardization4 %3 %1 %

Price/Cost64 %65 %- 1 %

Lead Time/Delivery/Process Reduction34 %35 %- 1 %

Competitive Advantage2 %3 %- 1 %

Minority/Small Supplier Development6 %9 %- 3 %

Volume/Quantity/Capacity10 %18 %- 8 %

Quality62 %79 %- 17%

Supplier Service / Support6 %24 %- 18 %

Customer Service / Feedback14 %38 %- 24 %

By examining the upper and lower quartiles of the differences between strategic and reactive companies key drivers (shaded areas), the differences in the focus of their development efforts emerge. Firms employing a strategic approach to development are more likely to be driven by the proactive need for strategic partnering, technology development, and a focused effort to improve performance of high volume critical commodities that have a major impact on the business. Reactive firms are more likely to be applying remedial approaches for suppliers that represent an immediate crisis or burning platform.

Figure 8 - SCOPE OF SUPPLIER DEVELOPMENT STRATEGIESNumber of suppliers currently involved development programsStrategic (n = 47)Reactive (n = 34)Diff.

0 to 510.6 %17.6 %- 7.0 %

6 to 108.5 %8.8 %- 0.3 %

11 to 156.4 %17.6 %- 11.2 %

16 to 206.4 %0.0 %6.4 %

21 to 2510.6 %8.8 %1.8 %

26 to 304.3 %11.9 %- 7.6 %

31 to 508.5 %8.8 %- 0.3 %

50 and up44.7 %26.5 %18.2 %

Total100 %100 %

Respondents also identified the total number of suppliers currently involved in development programs by choosing the category that best described their situation. Figure 8 indicates that strategic companies became involved in the development of a wider segment of the supply base, (in a majority of cases, fifty or more suppliers.) Reactive companies generally focused on a smaller group of suppliers. These summary statistics lead us to believe that reactive companies are in some cases still in the process of rightsizing their supply base, in eliminating poorly performing suppliers.

A manager at Chrysler noted the following:

Supplier Development has been talked about for a number of years at Chrysler, but in my opinion, this was largely lip service. Only recently has the company actually implemented development as a formal activity. Up to now, 80-90% of supplier development has been reactive in nature, and 10-20% strategic. Chryslers objective is to reverse this ratio, so that 60% is strategic and 40% reactive. This can be achieved by anticipating (proactively) problems before they occur by getting involved in Advanced Quality Processes early in the new product development cycle.

strategic supplier development processAs noted earlier, the primary differentiator between the strategic and reactive approach is a focus on identifying critical commodities and suppliers requiring development, with the driver being a strategic intent to improve the overall performance of the supply base. The following section describes the process model that we developed to describe activities used by leading edge companies in deploying a proactive, strategic approach to supplier development.

In the process shown in Figure 9, we differentiate between executive level and commodity team level decisions. The initial steps in the process (Steps 1 and 2) are typically carried out by an executive-level team, and are often driven by a corporate-level procurement / supply strategic plan. The remaining steps, involving specific commodity and supplier development approaches, are typically formulated, implemented, and monitored by a cross-functional commodity team, and often involve dedicated supplier development personnel. For further details on the steps involved in this process, refer to the GEBN Supplier Development Module Reportresults of strategic supplier development processOnce a development project has been initiated, progress must be monitored and tracked over time. Moreover, an on-going exchange of information is needed to maintain momentum of such projects. This can be achieved by creating visible milestones for objectives, updating progress, and in turn creating new or revised objectives based on progress to date. Project planning may require modifications to the original plan, additional resources, information, or priorities depending on events.

Both strategic and reactive firms used formal supplier certification/supplier recognition programs in their development efforts. Approximately 69 % of the strategic firms and 73% of the reactive firms use formal supplier certification/supplier recognition programs. However, the results in Figure 10 show that strategic companies achieved higher performance relative to prior performance levels for their most successful development initiative, and were better able to identify suppliers requiring improvement in areas such as cycle time, quality, total cost, delivery, customer services, responsiveness, and other areas.

Note that in all cases strategic firms more achieve a wider range of benefits more frequently than reactive firms. This may indicate that strategic firms are focusing development efforts across the supply base and are better at actively identifying, with supplier involvement, all of the issues that need to be addressed using a systematic approach.

Figure 10 - SUPPLIER PERFORMANCE

Performance AreaStrategic (n = 50)Reactive (n = 34)Diff.

Order fulfillment cycle time 74 %50 %24 %

Inventory turns 66 %47 %19 %

Inventory obsolescence 50 %32 %18 %

Logistics performance56 %38 %18 %

Process productivity 62 %44 %18 %

New product/process/service development time 64 %47 %17 %

Quality90 %76 %14 %

Product/service cost 88 %74 %14 %

Employee satisfaction38 %24 %14 %

On-time delivery performance 84 %71 %13 %

Total supply chain costs 68 %56 %12 %

Customer satisfaction64 %53 %11 %

Technology continuity44 %35 %9 %

Leading companies have successfully maintained momentum through a variety of mechanisms, including supplier participation on supplier councils, internal and external newsletters, and communication of key results via supplier performance reports.HARD ReSULTSThe reporting of specific results of supplier development initiatives was somewhat limited, due to the broad scope of these activities and the difficulty of identifying specific improvements associated development. The following sets of hard results were reported:

Quality

90% reduction in defects in 3 years 30% improvement in incoming acceptance rating in one year 4% improvement in meeting specifications 30% Scrap reduction Cpk improvement from .65 to > 1.00 80% to 90% improvement of PPM defective Improvement in quality rating from 99.72% to 99.84% in 4 years 100% avoidance of process shutdowns 24,000 PPM reduced to 2700 PPMDelivery

7% Stock availability improvement 100% on time delivery (several companies) 94% of line items filled within lead-time 26%% improvement of on-time delivery 6% on time delivery improvement 15% improvement of on time deliveryCost

$3 million in 6 months 10% reduction in price and freight cost $1million to $2 million cost avoidance 16% reduction in previous purchase prices 5% price/productivity improvement 8% improvement in total cost 35% improvement in price per unit 11.4% cost savings per year 10% cost reductionProcess Technology

10% improvement in operational terms

30% improvement in concept to customer cycle time over industry average

Cycle Time

28 days of inventory reduced (30 to 2 days)

41% improvement in cycle time (110 days to 65 days)

30% -83% lead-time reduction

SOFT ReSULTSAdditionally, companies reported a number of non-measurable soft results occurring due to supplier development initiatives:

Communication and Relationships

Growing alertness/awareness on quality and consistency in the suppliers organization. In some cases, have developed a system with early warning on quality deviations.

Faster, quicker decision-making

Improved communication with other internal functions

Awareness of business objectives, and more trust and acceptance of responsibility to delivery new business processes

Supplier clearly understand the business and how their products are used, as well as their impact on our processes

Loyalty between partners

Establishment of strategic alliances resulting in mutual gains for mutual benefits

Suppliers see a benefit in having a group that is helping them improve.

Relationships improve which helps in gaining quicker agreement on direction and speeding implementation

Process understanding by both programs

Delivery

Globalization Supplier expanding from being a local supplier in one region to a global supplier with a sales increase of 57%

Productivity

Better contribution of manufacturing resources per man-hour

Reduction in manpower requirements

Less than 50% of internal resources required compared to 5 years ago

Environment / Safety Improved safety performance on-site

Improved environmental compliance, avoidance of fines, and reduction of hazardous materials storage

Reduction of lost time injuries

Reduction in hazardous waste disposal

New Product Development

Increased number of supplier ideas and suggestions

Improved new product launch

Technology sharing

Customer Satisfaction

Improved customer satisfaction

Improved communication between supplier and field personnel that actually use the end product, leading to a better understanding of actual processes and application of service / material

Improved relations between buyers plants and sellers customers

Enhanced synergy between engineering and procurement groups at both customer and supplier, benefits of transferred resources

Good public relations

Supply Chain Management

Management of second tier suppliers increased substantially

Just-in-time delivery by local warehousing and supplier personnel to company location

Greater supplier use and number of orders released via EDI

Improved rail car management

Improved information sharing

Improved product availability

More stable supply

Improved planning and forecasting and supply chain integration

Reduction of inventory buyback and surplus inventory

Reduced contract management and improved logistics processes

Significant inventory reductions and savings in total cost of goods

Greater participation in information systems designed to reduce internal processes and handling costs of purchase orders

Evolution of delivery from no real window to a specific day

Reduced number of incoming inspections

Reduction of delivery delays

.

CAPS GLOBAL SUPPLIER DEVELOPMENT STUDY (1997)

In 1997, another research effort was carried out by Robert Handfield and Daniel Krause, and funded by the Center for Advanced Purchasing Studies (CAPS) and the Center for International Business Education Research (CIBER). The primary thrust of this study was to compare buying firms supplier development efforts across countries and across industries. Specifically, the research sought to compare buying firms supplier development efforts in the U.S. to buying firms supplier development efforts in the U.K., Japan, and South Korea, in the automotive and electronics industries.

This international research was driven by the need to better understand supplier development in a global context. With the advent of this global era, the rallying cry of organizations has now become: To compete globally, buy globally! A common term that is used to reflect this change is localization. Localization refers to the capability of an organization to identify and develop a supply base in the markets where it sells and/or produces. This strategy is employed for a number of reasons, such as the following:

Cost of transportation prohibits importing from current supply base in home country.

Government regulations in the Triad regions (NAFTA, EC, and AFTA) require higher levels of domestic content.

Companies need to capture superior supplier capabilities in the areas of cost, quality, speed, or technology regardless of where the supplier is located.

The need to configure products or services to meet local customer needs.

Whatever the reason, many organizations are seeking to develop a globally aligned world-class supply base that enables not only localization of product or service requirements, but that can create a competitive advantage in terms of cost, quality, delivery and technology.

Unfortunately, a great number of barriers lie in store for the purchasing executive seeking to deploy a global supplier development initiative. While many of the processes for developing a local supply base are well-documented, the processes required to deploy this strategy in a global environment are often not well-understood. In order to provide insights into the specific processes used by organizations to develop a world-class supply base, the researchers carried out a set of twenty-five case studies in the U.S., Korea, Japan, and the United Kingdom, followed by a survey of U.S. buying firms. The focus of the research was on the following question: What are firms in the U.S., U.K., Japan, and South Korea, in the automotive and electronics industries doing to effectively improve their suppliers performance to world class levels? These industries were chosen because they are generally characterized by high rates of competition, high rates of technological change and high levels of reliance on suppliers. The firms participating in this research are shown in Figure 11.

Figure 11 Firms Participating in the CAPS ResearchAutomotive:Electronics:

BMW (U.S.)

Chrysler Corporation (U.S.)

Daewoo (Korea)

Honda of America (U.S.)

Honda Motor Corporation (Japan)

Hyundai (Korea)

Isuzu (Japan)

Kikuchi (Japan)

Kia (Korea)

Lean Enterprise Research Center (U.K.)

Nissan (Japan)

Plastics Engineering (U.K.)

Prince Corporation (U.S.)

Rolls Royce (U.K.)

Rover (U.K.)

Unipart (U.K.)

Varity Perkins (U.K.)

Welsh Development Agency (U.K.)

Hewlett Packard (Scotland)

Hitachi (Japan)

IBM (U.S. / U.K.)

Intel (U.S.)

LG (Korea)

NCR (U.S.)

NEC (Japan)

Samsung (Korea)

Siemens (Korea)

Solectron (U.S. /U.K.)

Sony (Japan)

Scottish Enterprises (U.K.)

Sun Microsystems (U.K.)

In the CAPS report, the authors provide a process model that can aid managers in developing world-class suppliers in all corners of the world. The model is illustrated with best practices derived from case interviews, and is supported with additional insights from a survey questionnaire. The model is broad enough to be applied to any industry (product or service-related), yet must be interpreted and adapted to the readers unique industry and organizational characteristics. The description of the process model is followed by three cases that provide further insights into the supplier development process. A summary of the results from this research report is provided here.

Objectives of the Research

The primary purpose of this study was to investigate supplier development in terms of its use for companies that are striving to build an integrated and globally-aligned network of suppliers. In doing so the researchers sought to define the processes companies use to build a globally-aligned network of suppliers. Some background questions that were used to initiate the study included:

1. Why is supplier development important? What are the drivers of these efforts? What is the ultimate goal of firms supplier development efforts?

2. How do supplier development initiatives differ in various international regions?

3. Do supplier development efforts vary based on the goal of the effort?

4. How do buying firms and suppliers benefit from supplier development?

5. What are specific barriers to supplier development in an international context?

The focus of this research report is a process model that resembles the process being followed, as a whole, by a group of case study companies striving to build a globally-aligned network of suppliers. The model is depicted in Figure 12. Certainly not all the case companies had achieved a globally-aligned network of suppliers. In fact, not a single case company had successfully completed all of the steps in the process model across their entire supply base. Some companies had completed the process in selected regions of their supply base. Most of the interviewees noted that such a network represented the ultimate objective for their organization as they managed and sought to improve their unique set of suppliers.

Building the supplier development process model required a broad view of the case companies practices and a clear idea of which companies were best at accomplishing a particular step within the model. This report incorporates descriptions of companies best practices to illustrate the specific steps in the model. While the researchers would remind the reader that no single company had successfully negotiated every step in the model provided in Figure 11, many of the companies expressed a similar statement of where their supplier development activities must culminate: a globally aligned supply base.

KEY FINDINGS

Before purchasing organizations become involved in supplier development, other supply base management practices such as supplier evaluation and supply base rationalization should already have been deployed. In addition, the company should be able to demonstrate effective internal processes and capabilities. Asking suppliers to adopt practices and techniques that the buying firm itself has not adopted will only result in a loss of credibility with suppliers.

The model in Figure 12 depicts the four major stages in developing a globally-aligned supplier network. The four stages incorporate a number of intermediate steps:

Step 1: Identify Strategic Supply Chain Needs. The first step involves the identification of a need for improved supplier performance. This need should be explicitly identified and aligned with end-customer requirements and new product development targets. Such needs are driven by customers product-specific demands in areas such as cost, quality, delivery, technology and similar objectives, and broader needs in the areas of competitive priorities, global competition, and supply base deficiencies. It is important that cross-functional executive input occurs at this stage of the process, since the objective here is to identify the overall business needs in terms of cost reduction goals, technology roadmaps, global market expansion plan, and so on.

FIGURE 12 SUPPLIER DEVELOPMENT MODEL

Step 2: Search for Competitive Suppliers. This stage involves a worldwide search for competitive suppliers based on the criteria established in Step 1. Once a targeted global region is identified, a focused search in the region of interest is carried out. This targeted search is often facilitated and carried out in conjunction with local government agencies and/or partners within the region.

Step 3: Establish Performance Metrics and Assess Suppliers. Companies typically established a performance measurement system to assess and track suppliers performance over an extended period. Ideally, this performance measurement system should be real-time, and provide immediate feedback to the supplier.

Step 4: Supply Base Rationalization. As a function of the search and assessment, suppliers that are clearly not capable of meeting the companys needs are eliminated and the supply base is optimized. The outcome of this strategy is a pool of suppliers that are potentially capable of meeting the purchasing organizations need for products and services.

Step 5: On-site Risk Assessment by Cross-functional Team. Step 5 represents the first step in a series of true supplier development processes. Once a pool of suppliers has been identified, performance metrics are established in the following areas: cost, quality, delivery, cycle time, product and process technology, engineering capabilities and management skills. A detailed risk assessment of suppliers by a cross-functional team of specialists is performed. This team should spend several days with each supplier, and should note suppliers deficiencies, weaknesses as well as their strengths.

Step 6: Problem-Solving to Eliminate Suppliers Deficiencies. This step involves remedial action to correct suppliers deficiencies. In effect, this brings suppliers performance up to a minimum level to be able to serve the firm as a supplier. Once all immediate problems are resolved, the outcome is a supply base that is capable of meeting current requirements. In some cases suppliers are deficient, but the deficiency does not interfere with immediate production requirements. For example, a supplier may lack effective measures, lack engineering capability, or have process inefficiencies. These problems are noted and targeted for improvement on a longer-term horizon.

Step 7: Establish Open Relationship through Feedback and Information Sharing. This step precedes proactive development of the suppliers capabilities and is initiated by establishing an open dialogue with the suppliers top management. It is here that the Future Action Required items (from Step 5) are revisited and brought to managements attention.

Step 8: Systematic Supplier Development through the use of Direct Involvement Activities; Incentives & Rewards, and Warnings & Penalties. Techniques for supplier-improvement projects may include Kaizen Breakthroughs, process mapping, inventory reductions, training, total preventive maintenance, and other joint projects. These techniques are complemented by the use of award programs and increased business for the best suppliers, which serve as incentives for improved performance. Other techniques include introducing competition for the companys business and taking business away from poor performers.

It should be noted at this step that a different combination of approaches may need to be adopted, depending on the specific set of circumstances with any given supplier. This is particularly true when dealing with global suppliers in different parts of the world. The same supplier may have a very different set of issues at a US plant versus a Germany or Japanese plant, requiring a completely different approach. This was emphasized by one manager we interviewed at BMW:

In the case of BMW in the US, a very different approach was required. In Germany, the plants are established, and they have a group of suppliers who have a given level of understanding with respect to what we want. Here, however, communication with domestic suppliers requires sharing and a hands on support attitude - We have to spend time asking them What is your corrective action plan, and we will check on you from time to time - We need to suggest possible ways to put solutions in place - Which actions are more beneficial in a startup phase?

At Honda, a similar issue was noted by one manager we interviewed in Japan:Unfortunately, there are very few cases of truly global suppliers. For instance, R&D is very efficient in Japanese suppliers, but these same suppliers may not be effective at R&D in a different location. Thus, it is very seldom that they find a supplier that can supply multiple locations, yet locating these suppliers is one of Hondas most important development strategies. Finding good suppliers to serve both the US and Japan is not a problem: few suppliers, however, have truly global capabilities.

Step 9: Maintain Momentum. Appropriate incentives for improvement should be developed, in order to ensure that the improvement effort is not limited to a single process. The supplier must be encouraged to maintain a momentum for improvement and to make continuous improvement a part of the company philosophy. The outcome of a successful development strategy is a self-reliant supplier that can initiate their own improvement projects based on performance feedback from the focal purchasing organization.

Step 10: Supplier Integration in New Product/Process Development. Development continues with the integration of suppliers into the purchasing organizations supply chain network. This process may begin as the supplier provides input into the development of new products, processes, and services through mechanisms such as co-location, guest engineers, and sharing of technology roadmaps.

Step 11: Establish Performance Improvement in Second-Tier Suppliers. As an on-going dialogue between the two organizations develops, mapping of the extended enterprise should include an assessment and potential development of second tier suppliers, that is, the suppliers to first tier suppliers.

Step 12: Establish Integrated Supplier Network. Over time, the focal supplier will become part of the organizations global supplier network, and may be responsible for supplying multiple global locations and participate in global growth opportunities. As more suppliers achieve this capability, the final objective is to achieve a globally aligned supplier network. It should be noted that even the most advanced organizations interviewed in this study had yet to achieve this level of integration. Thus, this objective remains as a benchmark for organizations to strive for in the future.

The latter is a highly challenging goal. Some of the challenges noted by a manager at Honda include:

How much has Honda done to challenge the mother supplier to transfer technology to its children?

How to get the mother company to communicate value analysis and cost reduction ideas to their children?

How to enable the global network to communicate cost reduction opportunities, yet not use them exclusively to their advantage when they do so?

How to get Honda associates to force their local supplier to go back to the mother company and get help from a guest engineer or other form of expertise?

Some of the critical issues to consider in making this happen include:

Intensive negotiation and joint understanding and commitment at the top management level in the supplier

Participation by top management within Honda

A common investment for multiple locations, (e.g. Siemens supplies airbag control units to Hondas plants in both the Europe and the US, in order to minimize the investment in tooling. However, the control units are actually produced by the suppliers Mexican plant! Since the units are small, they can easily be shipped to both the US and Europe

Emphasizing competition. If a supplier already provides Honda with parts in, say, the US, they certainly have a leg up over other suppliers in being considered for supplying Hondas new facility. This is because they already know what our expectations are.

Honda places great value on a suppliers ability to improve. If a supplier experiences defects, but immediately takes countermeasures to prevent it from happening again, this is considered a plus by Honda.

We conclude with a final metaphor shared by a Japanese manager regarding the importance of supplier development in Hondas competitive strategy:

Every new product cycle is like a 110 meter hurdle race. The hurdles are the same for all of the racers, yet some are able to master them better than others. They include things such as quality problems, lack of trust, cycle time, FMEAs, customer requirements, new technology, etc. The finish line represents the product release. In every race, there is always a winner! The winner ultimately captures market share, profits, satisfied customers, etc. Generally, the winner is the one who is able to leap (e.g. manage) all of the hurdles and run (e.g. deploy) the strategy quickest. However, once the race is over, the racers continue to jog around the track getting ready for the next 110 meter race, which represents another chance to win! Although you did not win this time around, by the time you go around the track again, next time you may be a contender! One way of positioning supplier development is to understand what are the best practices at each of the hurdles that can turn contenders into winners. As the race continues, priorities will shift according to the nature of the hurdle.

Results of supplier development

The results of supplier development initiatives, while often difficult to identify and define, vary in scope and degree of success. Results can be largely defined into three separate categories: improvements in suppliers performance and capabilities, improvements to the relationship between the buying company and the supplier, and improvements in the buying firms competency in managing suppliers. Some of the results reported by companies surveyed in the U.S. are shown in Figure 13.

Figure 13: DEGREE OF IMPROVEMENT ATTRIBUTABLE TO THE FIRMS SUPPLIER DEVELOPMENT EFFORT

Area of ImprovementEstimated Percent Improvement

Order cycle-time (from order placement with supplier to receipt of item).19%

Quality (reduction in PPM, warranty returns, and so on).24 %

On-time delivery (ability of supplier to deliver within the buying companys specified delivery window).39 %

Percentage price change for this item (from this supplier).

3 %

Shared price reduction (cost savings shared with this supplier).

7 %

New product development time (from concept to volume production).19 %

Access to new technologies.15 %

APPENDIXTHREE BEST PRACTICES IN SUPPLIER DEVELOPMENT The following cases developed from on-site interviews with automotive companies illustrate some of the key differences in approaches used to supplier development by European, US, and Japanese automotive companies. The three cases include BMW, Chrysler, and Honda.

BEST CASE 1: BMWs Approach to Supplier Development

Supplier Development ApproachesThe primary focus at BMW in supplier development is through a program known as Process Consulting. This process was developed originally in Germany, but required modification before it could be adopted in North America. Richard mentioned that the revised approach is more suited to North American conditions, which are substantially different than the relatively well-developed supply base conditions in Germany.

Major Differences between German and North American Supplier Development ApproachesThe Process Consulting approach involves analyzing and telling suppliers what is wrong with their process. This works well in mature supplier environments, where the supplier really understands what the customer wants. Because the customer and the supplier have worked together over a number of years, a type of sixth sense develops, wherein the supplier intuitively understands the customers problems, which precludes the customer from having to explain their detailed expectations. (I have noted this in well-developed relationships, where a supplier can almost predict what the customers objections will be).

The following is a direct set of quotes from Richard Bourne, as best as I can recollect:

In the case of BMW in the US, a very different approach was required. In Germany, the plants are established, and they have a group of suppliers who have a given level of understanding with respect to what we want. Here, however, communication with domestic suppliers requires sharing and a hands on support attitude - We have to spend time asking them What is your corrective action plan, and we will check on you from time to time - We need to suggest possible ways to put solutions in place - Which actions are more beneficial in a startup phase.?

The State of South Carolina provided us with a good initial training program. (Ref: Handfield - can get details from Columbia, SC) - This was a good initial job of training - they did screening and some initial training with respect to what it might be like to work in an automotive industry environment, but to really do it means that you need people who understand processes and who make improvements, and who also understand the consequences of mistakes (i.e. other things go wrong later in the process!)

When we came here, the management teams at the new plant underestimated what support was needed, and also underestimated what our quality requirements would be. As a result, we were unprepared to focus our attention on BMWs quality standards. The supply base really did not understand what would be required of them. This resulted in a number of strained relationships with our supply base. Consequently, we ended up spending a lot of time communicating and showing them what was needed. This also led to a major effort to get buy-in from these suppliers.

The major difference between our approach and that used in Germany was that we could not simply act as a prop for their improvement, but the challenge was to get them to see it as a two-way street. In many cases, they needed support or needed us to make it happen - we had to make them understand that it was not simply a matter of you need support or you need us to make it happen, but rather that your problems are our problems! You have good products, bur you have to do better, and we are here to help you!

For example, a typical objective is to be 20% over the industry average, plus beat our competitors. Development is therefore a key impetus to make our suppliers better than the competition. One of the most important ways to achieve this is to communicate expectations. We have recently published a document (ref: Supplier Partnership Manual) which clearly delineates supplier responsibilities, process maps, and all expectations. Such a manual has also been published for our logistics, quality, and engineering functions. Moreover, you must be able to clearly communicate to people what you want, before you can expect it from them. To aid in this objective, we also regularly give seminars in which we present our Roadmap to Quality.

This is made all the more difficult because we are a relatively low volume product (60,000 units per year). At the time that suppliers were nominated / evaluated, some of their processes were based on a low volume approach, and were not as robust as our requirements demanded. As a result of the combined effect of new people + capital equipment problems + low volume processes, the result was many, many problems! To combat these problems, we worked on process capability (Cpks), training and capital equipment problems.Capital Equipment ProblemsA good example of the type of problem we encountered was a suppliers conveyor which was constantly breaking down, primarily due to poor design, and a temperature controlled environment that was exceeding the specification level. These two issues results in (1) shutdowns, and (2) product performance problems.

In the first case (1), the reaction was panic! Above all else, the supplier sought to keep production going, which in turn affected problem (2). We needed to fix problem (1), before attacking problem (2).

Resource Availability

BMW does not provide financial support other than owning production tooling at the suppliers location. We have provided the services of several people over a few weeks, and we have also offered suppliers support any time they request it. For example, we have sent maintenance engineering people, and procurement / logistics / quality people as needed to help suppliers.

Our current focus is that we no longer have problem-driven projects, but are pareto-driven in the last 4-5 months to identify problems and prevent them from getting any worse.

Supplier Council

Our major suppliers have gotten together, but they are not formally represented. The council is mostly an informal affair. Our administration helps/works with them on an ad hoc basis, and we have an annual golf game, but apart from that, there is not a strong council presence.

Engineering FocusBMW has traditionally maintained a very strong engineering focus in its organizational culture. This has resulted in a number of different approaches within the organization, especially with regard to the interface between supplier development and engineering personnel. We encountered a number of major obstacles within middle management that we have been able to overcome over the years.

Challenges - BMWA major challenge that exists at BMW involves standardizing expectations between here (the US) and Munich, as well as between purchasing and quality. BMW-Spartanburg currently has 70 people in Supplier Quality Assurance. Their intention is not have increase inspection, but they invariably require inspection for new suppliers.

An important lesson learned by BMW is for a supplier who is qualified and considered excellent in Europe, their subsidiary in North America may not be capable of meeting the same standards. Globalization involves more than just bringing in equipment and standards from Europe. Moreover, there are often problems in enforcing expectations, and increased training is often required.

Communication Problems

One of the biggest problems involved the surface of bumpers and body panels, which often had scratches, etc. In setting expectations, it was important to communicate that it was not just a matter of right vs. Wrong, but a matter of setting objective criteria. For instance, setting the standard might involve telling the supplier to hold the part under a light, and examining it at a certain angle to look for marks. For suppliers to understand these expectations, face-to-face discussions and communication and training are required.

(Note: This discrepancy was also confirmed in discussions with a BMW supplier. Engineers at Prince confirmed that BMW placed a strong emphasis on physical appearance of body parts, but that such expectations were not clearly communicated in the blueprint design. Moreover, how can one express physical appearances / finish on a blueprint, and how are we supposed to understand their expectations?) The most important and primary task with suppliers is to set standards that everyone understands AND agrees to. This is not so much a problem in electronics, but involves a huge problem in bodywork. Because BMW pays a lot of attention to detail, a big challenge is to reduce cost and reduce over-design, with the objective of competing with the same product from the customers perspective, even though it is built in the US, not Germany.

Supplier Development in Germany (Munich)Many supplier development efforts in Germany were established primarily with the objective of reducing cost as early as 5 years ago. Lately, however, the focus has been more on process optimization, as opposed to cost. (Note - recent Business Week articles suggest that BMW is outsourcing a greater proportion of manufacturing because of the cost of doing business in Germany - e.g. 30 hour work weeks, benefits, etc.) Process optimization refers to the practice of stabilizing processes and reducing parts per million defective, and the methods to achieve these objectives.

Process ConsultingThe primary tool applied in Germany is called Process Consulting. Process consulting involves having a group of BMW engineers visit a Germany facility, and explain to the supplier how to improve their process (e.g. in a consulting role). Because of the cohesiveness that exists within the Germany culture, such recommendations are easily adopted by suppliers. Brenda admits that this is an excellent set of tools, but that the manner of applying it in the US had to be modified significantly for the US supply base. Because many of the US suppliers were not mature, the process consulting concept had to be modified significantly. In Germany, the majority of suppliers are very mature in terms of their process capabilities, and so Process Consulting involved really just tweaking the suppliers processes. In addition, the cohesiveness that exists between Germans and the length of the relationship between BMW and its suppliers meant that most suppliers understood BMWs expectations very well. However, the US suppliers supplying the Spartanburg plant have relatively new facilities, and consist in many cases of fewer than 200 employees. The development effort has focused on helping supplier optimize their systems. A key concept involves having supplier understand where they are in their growth and development curve. For instance, many suppliers needed help initially just to get product out the door. In such cases, the emphasis was on solving the big problems that might lead to parts shortages, before attacking the big problems. In the first year of production, suppliers experienced severe ramp-up problems in response to the increases in production demands. In this phase of development, BMW weeded out 50% of the supply base if necessary. Some suppliers had gone through setup just a few months before, but because of their inability to ramp up, were shut out of the supply base.

For example, one supplier set up a paint line, but was unable to meet the different set of environmental standards imposed by BMW. They had hired a group of people who hadnt worked with paint processes before, and simply had no idea of cleanliness and environmental standards. In such cases, although the supplier had good methods, they required significant amounts of massaging before they could be used as a supplier.

Benchmarking Report

BMW has recently carried out a benchmarking report on supplier development, which entailed a set of detailed interviews with Toyota, Honda, Chrysler, Rover, and two other Technical support organizations associated with BMW, in order to compare approaches. The primary question involved was: How do other companies go about Supplier Development? This was done to augment existing German benchmarking studies in this area. The focus was primarily on supplier development processes being used, as opposed to performance and strategic-level benchmarking.

Lessons Learned BMW - Limited time and resources are available to develop suppliers

Suppliers need more hands-on help, and less theoretical help in improving their processes

Honda -Best to work primarily with focused groups, NOT huge teams

This is because people tend to get pulled to other activities, and lose track of the project

A hit list approach (where one comes up with a list of people/processes to eliminate) is devastating - one needs to listen closely to suppliers, even if their concerns are not directly related to your objective

Once ideas provide you with a list of ideas, implement them ASAP

Going in with a list of To Dos for them to implement simply doesnt work

Toyota - spend a considerable amount of time working on the human side

Adopt a very hands-on approach

Emphasize spending a lot of time seeking top management approval at the supplier, whereas others often dont see a need

Supplier Development operates as a separate organization

Operate a Supplier Support Institute, which is distinct from the purchasing department. This institute is not just a cost reducer - in fact, you dont even have to be a direct supplier of Toyota to attend, as long as you are in the Kentucky region

The key contact is Mr. Ohba, from Kentucky - *number provided by Brenda*

Note: BMW has an on-going dialogue with Toyota. The attitude is If what we do helps our competitors, that is okay, but we expect our supplier to expand their knowledge, but not to train our competitors suppliers.

Chrysler - relies extensively on their Automotive Industry Association Group (AIAG) program

Primary tool for development is QS 9000 - used as a baseline to determine areas requiring more work

Primary lesson learned is that development people need process experience to command respect in working with the supply base (not theoretical experience)

In some circles, the level of hands-on support is viewed as doing suppliers job for them - in reality, this level of support actually involves training the supplier to become self-sufficient. In this respect, supplier development can be very tricky. When our people leave, the supplier cannot fall apart again. We need to come back in some cases and help them get back on their feet again.

Rover - very narrow and deep application of supplier development

Use problem-solving tools to identify improvements. However, they acknowledge that this is not enough - need to identify root causes

Different levels of understanding of problem-solving exist within the supply base - this is brought out especially in Kaizen Breakthroughs

Need to follow-through beyond KBs - need to ensure that process changes are standardized

Comparison of Supplier Development Associates Average # of associates is 20-40 senior level people

By function - generally more technical/practical people, and fewer theoretical / consulting types

The Ideal Development Person is

very hands-on - good technical skills

good people skills and interaction, (not just Im the customer - do as I say!)

has ability to convince people

Motivator - must be able to push people to exceed their perceived capabilities

Good project management skills

It is easy to show results, but suppliers may be forced into showing these results, and they may not continue in the long term

Other Summary Data from Benchmark Report Approaches used include Score (Chrysler), BP (Honda), POZ (Process Consulting - BMW), and Toyota Production System (TPS - Toyota)

Percent of time spent on supplier development by Associates ranges from 30-100%

Key measures used to assess supplier development progress includes Cost, PPM, throughput time

Key slogan - Powered by Honda - phrase used for all Honda motors in 1997 appears on many different products

Supplier Input on Approaches

Liked BMWs approach - good communication, emphasized basics

Honda - good recognition as a result of their efforts - were able to leverage with other customers

Ford - havent updated their tools for some time - very outdated

Best Case 2: Supplier Development at Chrysler

(Note: This was written prior to Chryslers merger with Daimler, when Purchasing was under the leadership of Thomas Stallkamp).

Chryslers Purchasing and Sourcing StrategyChryslers purchasing and sourcing strategy is based on leveraging the resources and capabilities of internal organizations and external suppliers to continuously impact the quality, cost, technology and delivery of Chrysler vehicles for our customers. The organization has evolved into one where continuous improvement has become a way of life, and suppliers are considered as integral members of the Chrysler Extended Enterprise.

SCORE (Supplier Cost Reduction Effort) is a continuous improvement process Chrysler utilizes to increase Chrysler/Supplier communications and teamwork. The SCORE approach enables Chrysler to work more closely with its suppliers in the design, development and production of high-quality, cost competitive products - to surpass the requirements of its vehicle customers. As a result Chrysler has become the global benchmark for supplier relationships and cost competitiveness.

Procurement and Supply centralizes control of commodity and supplier strategies, policies and procedures while providing focused support to Chryslers platform teams. There are five organizations that report to the office of the Executive Vice President of Procurement of Supply:

(1) The Procurement and Supply Process Team which includes

Platform Supply

Supplier Management and Supplier Quality & Development

(2) Supply

(3) Special Supplier Relationships

(4) Operations and Strategy

(5) International Procurement

Major Responsibilities of Each Organization

Platform Supply Coordinate P & S activities to meet platform variable and investment cost objectives

Coordinate supplier quality activities in support of vehicle quality objectives

Manage vehicle supply risks

Manage tooling, equipment, and construction procurement

Communicate platform requirements into P & S and coordinate resource deployment to support requirements

Supplier Quality & Development

Develop and implement methods and tools to improve vehicle quality to corporate objectives

Manage advance quality planning and current vehicle quality problem identification and resolution

Measure supplier quality performance to objectives

Minimize quality risks on assembly tooling and equipment and production vehicle components/systems

Work with suppliers to improve manufacturing processes and resolve process issues

Work with supplier management to develop and implement supplier and commodity management strategies

Supplier Management

Coordinate the development and implementation of supplier and new commodity y management strategies

Manage costs, manage supplier relationships and work with engineering to introduce new technologies

Leverage supplier expertise across platforms

Encourage supplier participation in continuous improvement initiatives

Manage daily supplier business transaction activities

Manage Service and Parts procurement

Supply

Develop and manage worldwide supply network to ensure the timely, cost effective and quality delivery of materials and finished vehicles to customers

Establish production programs and vehicle build schedules

Ensure parts availability for pilot, launch and volume production

In cooperation with vehicle platforms, conduct engineering development of methods and procedures for total materials management

Develop and implement logistics supplier and commodity management strategies and conduct operations of Chrysler Transport, Inc.

Special Supplier Relations

Identify and develop qualified ethnic minority-owned companies for Chrysler business Develop and monitor Second Tier Minority Supplier Sourcing Strategy Mentor key minority suppliers Facilitate dialogue between Chryslers senior management and key minority suppliers Participate in regional trade fairs and interview prospective suppliersOperations and Strategy

Manage procurement of non-production suppliers and services for Chrysler facilities Develop and implement benchmarking and training programs Develop and administer Procurement & Supply policies and procedures Conduct special strategic studies to improve P&S operations Coordinate supplier special events, supplier communications and measurement activities Coordinate P&S continuous improvement and value engineering efforts Coordinate Chryslers SCORE programInternational Procurement

Provide Procurement support to off-shore assembly and manufacturing locations Identify and develop suppliers in the host country to provide for Local Content Facilitate the establishment of Chryslers key North American Suppliers in foreign locations Provide a liaison function between P&S International Operations and the Platform Engineering teams Provide Supplier Quality training and guidance to off-shore Chrysler locations including certification of in-country approval labs Assist in the resolution of parts shortage issues associated with International SupplyComments from Gary Anderson Director of Supplier Development

Gary has a total of 45 years experience working in the automotive industry. This includes 15 years of experience working with Chrysler, and 15 years prior to that working with AMC. He has been Head of the Supplier Development group for 1.5 years. He reports to Cindy Hess, who is head of Supplier Quality, and also to the Platform Supply Group (formerly headed by Steve Zimmer). This was effective as of March 1996, (the latest iteration of Chryslers organization). The Supplier Quality group consists of Supplier Measurement and Feedback, Quality Process Improvement, Process Specialists, and Supplier Development and Technical Assistance.

Process Specialists The Process Specialists are a group of 15-16 individuals, who specialize in areas such as castings, machining, etc. These individuals are typically in a reactive mode, in that they respond to quality/delivery issues when measurement indicators signal that a problem exists. For instance, if a supplier is experiencing persistent process problems that are evident, and the normal set of contacts cannot resolve it, then the process specialists become involved. In such cases, these individuals have the requisite skill set, given that the relationship is positive (win/win), which allows them to watch the line for awhile, talk to the suppliers production people and get an idea of what the actual problem is. They then work with the suppliers technical people to determine what is wrong with the process arrive at conclusions regarding a solution. This may take two to three days, with some repeat visits (an additional 2-3 times), and the isolated process incident is resolved relatively quickly. At that point, they move on to another supplier, and travel all over the world fighting fires. This type of reactive supplier development has been used for a number of years.

Recent Applications of Proactive Supplier Development Supplier Development has been talked about for a number of years at Chrysler, but in Garys opinion, this was largely lip service. Only recently has the company actually implemented development as a formal activity. Up to now, 80-90% of supplier development has been reactive in nature, and 10-20% proactive. Chryslers objective is to reverse this ratio, so that 60% is proactive and 30% reactive. This can be achieved by anticipating (proactively) problems before they occur by getting involved in Advanced Quality Processes early in the new product development cycle. In this respect, the process specialists would still play a role, but would get involved in process choice decisions before they are committed to, in advance of problems. This migration has started to take place. Specialists in stampings, castings, and machining are looking at process FMEAs and identifying problems in new product development on a more regular basis.

Criteria for Supplier Development Selection On the other hand, supplier development specialists work with chronic problem suppliers with systemic issues that go beyond simple process problems. These suppliers dont just have a problem with their process: They just dont get it! In most cases, these suppliers either:

Choose to ignore the problem Dont take the problem seriously Have serious financial problems Have senior managers who have the wrong philosophy.In such cases, these suppliers are chosen for supplier development activities. Some of the other criteria that are used to involve a supplier include:

At least $1 M business a year with Chrysler Part of sourcing strategy for at least the next two years (parts for model) Have been identified as having a serious poor quality track record (PPM) as and a referral for assistance either from manufacturing, warranty records, or recent product launch and delivery data These problems have been systemic for at least the last two years.These type of records essentially tell a story regarding the suppliers history of continuous problems. The normal quality organization is unable to handle it. They may or may not have had a process specialist come in already. In such cases, these individuals have been unable to deal with the problem, or the specialist has realized that a more serious problem lay behind the supplier. In such cases, an on-going dialogue with these suppliers has provided them with many directions for improvement, yet they have continually been unable to comply, and continue along a different path with a different agenda. In such cases, the fundamental question is WHY? When this occurs, Garys people are called in. Although they may involve the process specialists later on in the SD process, this type of situation clearly calls for a different approach.

Types of Suppliers Who Require Development Interestingly enough, there is no single pattern when it comes to the types of suppliers who fit into this category. To date, Garys group has worked with 35 different suppliers and 45 different manufacturing locations. This group has consisted of large, medium, and small suppliers. Some of them are in the top 10 in terms of volume (but problems occur in one of their facilities), top 50, as well as Top 150. They also span multiple commodity groups (in fact, all of them!) There is simply no distinguishable pattern in terms of identifying which suppliers are most likely to have this problem! The only common feature linking all of these suppliers is the lack of good management.

Supplier Development Process

1. The supplier receives a letter signed by the commodity manager and Gary that states that we want to help you maintain your position as a major supplier for Chrysler.

2. A meeting is held with the senior executive, top manufacturing manager, and top quality manger. At this meeting, Chrysler defines why were here, and emphasize that they seek to work within a win/win environment. They want to help the supplier maintain their position with Chrysler, and then present the performance indicators (hard facts) that explain why we are here (quality, delivery problems, etc.) In most situations, this initial meeting is welcomed with accolades; as it is an opportunity for free help! These conversations are held in extreme confidence, and no one can use it is future price negotiations, etc.

(It should also be noted that supplier development efforts in some cases still do not work. Some suppliers do not respond after multiple interventions. Even though they are saying the right things, nothing happens. Involvement with suppliers spans between 6 months and 1.5 years on average. 80% of the time, there are significant performance improvements. In 20% of the cases, there are none.)

3. In the next phase, teams of two people are dedicated to a supplier location. All of these individuals are QS 9000 trained. The same executive from Chrysler who initially met with the supplier accompanies the team to meet with the plant management group, to prevent any perceptions of confrontation that may exist.

4. This is followed by a 2-3 day assessment (this is NOT an audit). The assessment identifies what they do well, and where they fall short. The assessment is structured as follows:

Beginning with top management: Is there a business plan? What is the operating / management philosophy?

It assesses all segments of the organization, including quality, purchasing, and engineering, materials handling, preventive maintenance, tooling, etc. What are the strength and weaknesses of each area, and what is the action plan to carry out and address each of the weaknesses.

The assessment is held in extreme confidence. Only the top managers within the SD group are in contact with the top managers, and the information is not shared elsewhere within Chrysler. The SD people at Chrysler will not share the specifics of the suppliers problems, even with the commodity group managers at Chrysler. This is done to ensure that the supplier who shares information with the SD group can provide all required information so that they can truly help, without risk of jeopardizing their position!

5. The outcome of the assessment is an action plan. This plan outlines which people in the organization are responsible for working out the problems. This typically involves a set of 1-2 day visits, 1-2 times per month. These visits may be to the manufacturing site, or to the companys headquarters, depending on the nature of the problem. In some cases, Chryslers intervention identifies the problem as being the communication between the plan and the engineering facility as the root cause of the problem.

Buyer Development Becoming a Better Customer Chrysler is also introspective with respect to their role in supplier development, and often seeks to look in the mirror. This is done to enhance the positive nature of the partnership, especially in cases where Chrysler has invested in the supplier a lot over the years and has developed significant commitment. However, in cases where a SD project is underway with the supplier, no new volumes on new projects are committed to with the supplier. Even in situations of extensive commitment, if the intervention is unsuccessful, then Chrysler may need to switch suppliers.

Second Tier problems In 40-60% of the cases that we become involved, the problems of a first tier supplier, when driven to its root cause, are the second tier supplier. What we find is that the people in the first tier are letting it ride. In such cases, we have to ask them why arent you developing your suppliers? Why arent you involving them in your problems? This requires that we provide their purchasing people in training in advanced quality planning, not necessarily in supply base management!

Why Supplier Development? In most cases, however, Chrysler is willing to invest in an ongoing supplier than switch. This is because we would rather deal with a known quantity than deal with an unknown. We have already invested lots of money with them, they understand our systems, and we understand theirs. The Supplier Development initiative is, in a sense, a last resort. We do not commit any incremental investment while we are involved with them. The outcome is either positive (we create new business with them) or negative (we need to find a new supplier) at the end of the process.

Looking in the Mirror

Chrysler also needs to take an introspective approach every now and then, and identify ways to improve our communication processes. This is a form of Buyer Development, in that in 40-60% of suppliers problems have been contributed to by Chrysler. This involves things such as changing requirements and not telling them, making design changes at the last minute, etc. The question then becomes, what can Chrysler do to help the supplier? In other cases, it is not the supplier, but their second tier suppliers who are at the root of the problem. They are receiving poor products or later deliveries, but are letting it ride. Chrysler needs to go in and provide training in such cases on supply base management, even though they are already getting training in advanced quality planning. Suppliers must understand that they are responsible for developing their supply base in order to sell to Chrysler. This may involve sending the supplier to classes in Chrysler Quality Institute. Gary has a fair amount of leverage internally. His people try to correct problems within Chrysler in a non-threatening way. The internal assessment is shared with no one else in Chrysler, so that it cannot be used in future price negotiations. At best, other Chrysler purchasing people may see an Executive Summary of the situation which has been edited so that it is politically correct. In this way, Supplier Development can work with the supplier to understand what Chrysler people are doing that may be causing problems. By approaching the supplier in a reasonable manner such as this, the supplier can understand why the development team is there, and can also understand why change is important.

Suppliers Top Management is Critical Over the last 18 months, 2-3 supplier interventions have failed (out of a total of 35 suppliers). Gary maintains that the key to success is top management at the supplier. If the suppliers top management is willing to listen and understand, than a major part of the problem will be eliminated, and the intervention will work. This is similar to an intervention with an alcoholic if they listen and are willing to admit there is a problem, there is a chance it will work. Some of the problems may be simply that they are not measuring their performance internally (on cost, quality, delivery, etc.). At the larger suppliers, when they talk to the people at the Director level, they often find that they dont measure the right things. For instance, perhaps they are measuring the number of parts made today, but not the number of defective parts made. Generally speaking, what gets measured gets managed. This is a major insight to many Directors! In some cases, the PASS reports (supplier evaluation reports) provided by Chrysler to the supplier has never been seen by the Director of the supplier!

No Financial InvestmentsChrysler provides almost no financial investments in suppliers, except in cases of a dire emergency. An emergency might be, for instance, a minority supplier who is facing financial distress. Some indirect financial assistance may be provided. This policy is a function of the price of entry in the auto industry as a whole: it is a capital-intensive industry, and through a process of natural selection, only those companies who can make the financial thresholds have a chance of surviving. Almost all of Chryslers suppliers are US-owned and operated companies (non-transplant).

Human Resource Issues In some cases, Chrysler will help suppliers with their HR issues. For instance at one supplier, there were too many contract people, and an excessive high turnover of salaried employees. It turned out that the pay levels for these people was too low for the region. In general, Chrysler does not however get involved in union negotiations.

Supply Base Reduction Chrysler has undergone a significant reduction of its supply base to date. The late 80s and early 90s were a period of high supply base rationalization. This is an on-going strategy today (but at a lower rate), with the goal being to single source by part number, but with at least two suppliers per commodity. The business is then shared across platforms. However, the business for a model within a commodity group will not be shared across suppliers. This is intended to maintain/foster competition among suppliers, yet get the benefits of single sourcing.

Supplier Involvement in New Product Development The technical people at Chrysler now understand the importance of making sure that the latest technology is being introduced into new models from the supply base. Gary is involved in ensuring that suppliers are capable of meeting Chryslers technology requirements, and that they have the capability before they become involved in the new product development process. For example, suppose a new supplier to the auto industry is being considered for sourcing a new technology. Garys group will work with the supplier to help them understand how to do business with Chrysler and to shorten the learning curve. One way this is being done is through the development of a book that documents how to do business with Chrysler, and covers such details as quality requirements, engineering, supply policies, etc. We often assume that everyone knows these details, but a new supplier does not!

International Supplier Development This learning book will be especially useful as Chrysler begins to produce and source in Europe and South America. For instance, Chrysler will be building a Jeep in Beijing China, and is establishing an assembly plant in Gratz, Austria and Stire, Austria. It also has facilities in Venezuela, Argentina, and Brazil, and is establishing a joint venture with BMW in Brazil to have local assembly of 6 cylinder engines. However, the involvement in supplier development to date has been 100% North American suppliers (including Mexico). Gradually, this will change, as the supply base is expected to move into Eastern Europe and Latin America.

Supplier Dependence There is no formal cap on supplier volume, but for smaller suppliers, Chrysler keeps an eye on their total volume to Chrysler. If it begins to rise over 40-50%, they need to ask themselves if this is wise as it may foster too much dependence. At this point, the supplier may be encouraged to get more business elsewhere. Gary also notes that loading up a really good supplier with too much work can cause additional problems. The supplier may lose their enthusiasm, which is something that Chrysler wants to keep in a learning organization. Chrysler also has a finance group within procurement that evaluates suppliers financial health. It is also important to understand what the second and third tier suppliers are doing and what is going on. For instance, one second tier supplier selling to a first tier was also selling directly to Chrysler. Although the quality to Chrysler was acceptable, the quality to the first tier was no good, and the supplier eventually went out of business. This makes the Extended Enterprise all the more important.

Breadth versus Depth In corroborating the BMW benchmarking study, Chrysler has a wider scope of breadth than BM., but less depth than Toyota and Honda. This is primarily because these companies have more dedicated resources in supplier development than Chrysler.

Information Systems in Supply Base A major issue here is whether suppliers have effective measurement systems to gauge performance (especially quality), and whether they communicate effectively between their functions. This is important, because 12 months from now, all suppliers are going to have to have EDI to effectively supply Chrysler. Chrysler recently benchmarked 8-9 suppliers, including 2 Pentastar Platinum Award suppliers. These best in class suppliers in general had the absolute essentials in place: top management was committed to excellence, and the measurement systems were complete and measured all of the critical areas, including process, inventory, quality, and delivery. Further, these measures were reviewed every week for at least 2 hours every week by the entire team, and were updated on a daily basis. However, they also uncovered a number of problems, even with these suppliers. The suppliers had no Cpk (process capability indices) being tracked in their system, and although they tracked SPC charts, they were not effectively being used.

Suppliers communications with Chrysler are a big problem in information systems. Suppliers are not clearly establishing clear contacts within Chrysler with respect to information on quality, purchasing, etc. Part of the problem is that Chrysler is also not clearly identifying expectations, requirements, deadlines, and late design changes. This latter issue is an especially big problem. To remedy this situation, Chrysler has instituted a new policy called 4-Ever Requirements:

If you have a problem, CALL us.

If you change your materials, CALL us.

If you change a process, CALL us.

If you change a manufacturing location (process location), CALL us.

This policy has been instituted, because even an innocuous change to a material/process can have disastrous consequences. In one case, a supplier moved an entire supplying process to a different plant, and did not tell Chrysler! At that point, they did not know who their primary contacts in engineering, purchasing, and quality was anymore!

Supplier Councils This is headed up by Thomas Stallkamp, Executive Vice President of Purchasing at Chrysler. Stallkamp meets with the Supplier Executive Roundtable every 2 months. The Roundtable is composed of senior executives from 15 direct suppliers, 1 raw material supplier, 1 tooling supplier, and 1 indirect material supplier. Under the Executive Roundtable, there also exists a Supplier Management Roundtable (led by Senior Procurement Executives), and a Quality Roundtable (led by Supplier Development and quality executives). The structure of these roundtables also mirrors the Executive Roundtable. Every year, 1 2 suppliers are rotated in/out of the Roundtables. Suppliers are selected for inclusion only if they are key suppliers of key technologies, high volume items, etc. Inclusion on the Roundtable is by invitation only. Unfortunately, there is little cross-fertilization across the different Roundtables. At the Supplier Development Roundtable, Gary works in running by suppliers some of the different approaches, techniques, and tools that will be used in the future to get their feedback.

Twice a year, Chrysler also runs Supplier Events, in which the top 130 suppliers are invited to get the best of them involved. At this meeting, the Executive VP of Purchasing talks with suppliers on industry trends and Chryslers needs.

The Formalization of Supplier Development The impetus for a formal supplier development program at Chrysler began 2 years ago, which was when Garys supplier development department was originally started. Procurement executives came to the realization that they had a lot of catching up to do in the quality area. Chrysler has significantly raised their internal and external quality benchmarks, and the company realized that suppliers are incapable of doing this on their own. This was both a top management and purchasing realization. Some suppliers need a lot of help, and we dont have the time to help them! Yet we realized that if we dont do it, nobody will. Helping suppliers thus just made good business sense. This resulted in the formation of a formal Supplier Development group headed by Gary. New headcount was added instead, several departments had to provide some of their best people, in order to create a vested interest. Now however, Supplier Development is in the process of adding people because of the enormous demands.

Justifying Supplier Development In order to justify the formation of this group, some key measures needed to be established. Performance of the group to date has been impressive:

35% of suppliers have increased quality, etc. by more than 70%

35% of suppliers have increased quality, etc. by 40-70%

20% of suppliers have increased quality, etc. by 1-20% BUT

10% of suppliers have actually gotten worse!

In working with downstream carriers, the group has been successful in reducing damage to vehicles being transported, reduced the cycle time required to get vehicles to customers, and increased the number of delighted customers at the dealerships by working to better manage diagnostics and faults. They have also worked more closely with suppliers to improve delivery of aftermarket warranty parts (this group also reports to the Supplier Management group.)

Customer Advocate Group This group is chartered to listen to the dealerships and bring the voice of the customer back to Chrysler (BEFORE the warranty reports start rolling in). In 1996, Chrysler established a Warranty Reduction Program that involved 14 suppliers initially, and which has 60 suppliers today. The focus of this program has changed from blaming suppliers for problems, to encouraging suppliers to take the lead in assessing warranty issues and getting them resolved. They are given warranty targets in order to get SCORE credit. Suppliers leadership is incited to resolve warranty issues, and Chrysler gives these suppliers on-line access to warranty data. Currently, 175 suppliers have access to this data. The focus of this program is on reducing warranty costs. No finger-pointing is involved, but suppliers are expected to just fix the problem. Automotive Industry Action Group (AIAG) This group was formed by the Big Three and its suppliers in an effort to get together and resolve issues of a common nature (such as EDI standards). Most recently, it has developed a common quality standard called QS 9000. This has also proven to be a significant supplier development technique, as it provides a common language and system for managing quality. To date, a significant portion of the supply base is registered to this standard. However, the standard represents only a base from which to begin quality improvement. The real challenge is to maintain the discipline needed after the initial QS 9000 certificate, and adhere to processes. QS recertification occurs every 6 months.

Work with External Parties Chrysler has most recently been working with the Edison Welding Institute in Ohio to help provide technical assistance to suppliers. The Institute is half funded by the government, and half funded by Chrysler. The objective of the institute is to improve Chryslers welding/joining capabilities, by developing a set of procedures to follow in welding processes. So far, five suppliers have adhered to the new process, while a sixth supplier is NOT following the process, but wants to go outside of it. . Gary has emphasized that the supplier MUST follow the process.

Mentoring In some cases, suppliers have undergone mentoring by other suppliers in the supply base. Future: This is a relatively new program that may be formalized in the For instance, one supplier has had problems with managing the level of torque required in their processes. This supplier has since undergone a mentoring process by another supplier, who is considered a good supplier to Chrysler, but not a competitor to the supplier experiencing the problem. The technically proficient suppliers supplier from a different commodity group has stepped in and helped advise them on how to manage torque, acting as a mentor.

Best Case 3: Supplier Development at Honda

Honda began in 1948 in Hamamatsu, Japan, as a manufacturer of war surplus generators attached to bicycles, thus creating a crude form of motorcycle. The company thus began very modestly, but by 1954 had adopted the following motto:

International viewpoint

Products of the highest efficiency

Reasonable price for customer satisfaction

The company was not allowed to produce cars, but early on Mr. Honda began hounding a government official to allow him to produce cars. It first entered the automobile market in 1964, when the official finally gave Mr. Honda the permit after he camped out outside his office for several weeks! However, upon getting the permit, Honda found that few suppliers were willing to provide parts to the company. Thus, the few suppliers who were finally convinced to supply the company were instrumental, and Honda has maintained closeness with its suppliers. These initial suppliers are still supplying Honda today.

Currently, Honda of America has 322 domestic suppliers, of which 50 are raw material suppliers. The company has only separated from 12 suppliers since 1958, in cases when the suppliers refused to improve their quality. Process/quality improvement is a major factor evaluated in supplier relations